Recent agency guidance, rulemakings, and enforcement
actions—all issued prior to the change in
administrations—demonstrate the financial regulatory
agencies' commitment to enforcing the Bank Secrecy Act and its
implementing regulations (BSA), and, in particular, their
willingness to hold lead compliance professionals personally
accountable. Add to that the new administration's rhetoric of
fighting terrorism and bolstering national security, and financial
institutions should expect an upsurge of anti-money laundering
(AML) supervision and enforcement in the coming years.

I. Recent Actions Imposing Personal Liability

Two recent enforcement actions against financial institutions
and their AML officers support this expectation and should serve as
stark warnings to individuals charged with ensuring compliance with
the BSA.

SEC Order Instituting Administrative and
Cease-and-Desist Proceedings. In January 2017, the
Securities and Exchange Commission (SEC) filed an order instituting
administrative and cease-and-desist proceedings against a New
York-headquartered broker-dealer and its Chief Compliance Officer
and AML Officer for alleged violations of the BSA and other
securities laws.1 The order alleged that the company
facilitated the unregistered sale of hundreds of millions of penny
stock shares—including those occurring in accounts controlled
by microcap stock financiers who were separately charged by the SEC
with conducting a pump-and-dump scheme—without performing
adequate due diligence. Regarding those transactions and others,
the order alleged that the company and its AML Officer failed to
file required suspicious activity reports (SARs) for $24.8 million
in suspicious penny stock sale transactions, which earned the
company at least $493,000 in commissions.

The order alleged that the AML Officer was personally
responsible for monitoring customer transactions for suspicious
activity and ensuring the firm's compliance with SAR reporting
requirements, citing the company's AML program, which required
all identifications of red flags or suspicious behavior to be
elevated to the AML Officer, who would then determine whether or
not and how to further investigate the matter and whether to file a
SAR.

In reaching its findings, the order also cited to agency
guidance and the AML Officer's apparent failure to adhere to
it. Specifically, the order identified written guidance relating to
microcap stocks issued by the Financial Industry Regulatory
Authority (FINRA) and the SEC's Office of Compliance
Inspections and Examinations (OCIE), both of which identified
several red flags indicative of potential money laundering.
Notwithstanding agency guidance and the company's AML program,
it was alleged that the company repeatedly violated the BSA, and
that the AML Officer caused and aided and abetted those violations,
by failing to file required SARs concerning dozens of potentially
illegal stock sale transactions by its customers.

The order also is an example of the SEC's aggressive use of
AML program and SAR filing requirements to require securities firms
and their supervisory and compliance teams to monitor for and
report potential violations of federal securities laws by customers
and counterparties.

FDIC Cease and Desist Order and Civil Money
Penalty. In December 2016, the Federal Deposit
Insurance Corporation (FDIC) brought an enforcement action against
the President and Chief Executive Officer of an Arkansas
state-chartered non-member bank with $37 million in assets for
alleged violations of the BSA.2 The individual also
served as the bank's BSA Officer for a period of time. Based on
allegations that he failed to file timely SARs, he consented to a
cease and desist order that imposed ongoing compliance
requirements, including periodic training requirements and to
"[f]amiliarize himself with and adhere to the FDIC Guidance on
Payment Processor Relationships, as set forth in FDIC Financial
Institution Letter 127-2008 as revised by FDIC Financial
Institution Letter 41-2014[.]" In addition, the individual
consented to a civil money penalty (CMP) in the amount of $35,000,
for which he was prohibited from seeking or accepting
indemnification from the bank.

II. Personal Liability Takeaways

The SEC and FDIC orders serve as warnings to the financial
services industry that personal liability arising out of BSA/AML
violations continues to be an enforcement objective of the federal
bank and securities regulatory agencies under certain
circumstances. To protect themselves and the institutions they
serve, AML officers and compliance divisions should ensure that
their policies, procedures, and practices reflect relevant
regulatory expectations and should request allocations of
additional resources if necessary to meet to regulators'
expectations.

In particular, the FDIC order suggests that individuals at
smaller institutions may be more susceptible to individual
liability than peers in similar positions at larger institutions,
as they may have a greater degree of influence over the
institution's AML controls. This concept has been corroborated
by government officials. In October 2016, a former chief of the
Asset Forfeiture and Money Laundering Section at the Department of
Justice stated, "[i]n order to hold an individual responsible
for breaking [the BSA], you would have to say, essentially, this
person caused the institution to be criminally deficient in its
[AML] program. So, we have used that occasionally, but it tends to
be with smaller institutions where you can really attribute all the
decision-making to one person or one small group of
people."3

In addition, common to both orders are the allegations the AML
officers failed to heed the warnings contained in agency-issued
guidance relating to the risks of certain customers and products.
Such criticisms highlight the importance for AML officers of
ensuring that their institution takes a risk-based approach to
compliance, properly devoting enhanced diligence and monitoring to
higher-risk customers—such as third-party payment
processors—and their transactions. Bank compliance personnel,
and especially AML officers, should diligently review industry
developments, including new regulations, guidance, and enforcement
actions, to ensure they are equipped to identify and detect the
risks most concerning to the regulators.

III. AML Outlook

Although significant
regulatory relief is expected in the financial services
industry in light of the new administration's stated
objectives, we do not anticipate the administration will ease AML
enforcement. In fact, given the administration's focus on
national security and state and federal regulators' recent
rulemakings and guidance, it is more likely that enforcement of the
BSA is an area of supervision that will increase in the coming
years.

From a policy perspective, there are numerous indications that
AML will remain a top priority. Recently, the Office of the
Comptroller of the Currency (OCC),4 the SEC,5
and FINRA6 have each identified AML as a supervision or
examination priority for 2017. Moreover, in December 2016, the
Financial Action Task Force published its Mutual Evaluation
Report7 on the AML/counter-terrorist financing measures
in the US, which identified a number of weaknesses and
deficiencies. As a remedy, agencies are likely to take a more
rigorous approach to AML compliance examinations, which may
ultimately result in an uptick in AML enforcement.

The Financial Crimes Enforcement Network's final Customer
Due Diligence Rule (CDD Rule) seeks to address one of those
identified deficiencies: beneficial ownership. Under the CDD Rule,
financial institutions are required to identify and verify the
identity of the beneficial owners of most legal entity customers at
the time a new account is opened, necessitating significant
operational changes to financial institutions' existing AML
programs. The CDD Rule, which also formalizes existing expectations
of customer due diligence imposed on financial institutions as the
"fifth pillar" of AML compliance, became effective on
July 11, 2016, and has an "applicability date" of May 11,
2018. Many institutions have already begun implementing changes to
their compliance programs to conform to the CDD Rule in advance of
the compliance date. In at least one public enforcement action, the
OCC has already imposed the CDD Rule's requirements on a bank,
including as a provision that the bank should consider the CDD Rule
in developing customer due diligence and enhanced due diligence
policies and procedures.8

Separately, the New York Department of Financial Services'
(DFS) new risk-based anti-terrorism and anti-money laundering rule
(DFS Rule) became effective on January 1, 2017, requiring New
York-regulated institutions to bolster their AML programs and, most
significantly, to provide a personal certification to the DFS that
those enhanced programs meet the DFS' expectations.
Interestingly, in the assessment of public comments accompanying
the DFS Rule, the DFS explicitly left the door open to civil and
criminal liability resulting from the certification, stating,
"if such [an AML] program is not reasonably designed and if
the compliance finding is not based on a review of necessary
documents and materials, the certifying individual(s) may
appropriately be subject to the Superintendent's civil
enforcement powers, and if the compliance finding was made with the
intent to deceive, to criminal penalties."9 The
implementation of the DFS Rule raises the compliance standard for
New York institutions during an already active period of AML
enforcement. Since August 2016, the DFS has entered into four
public AML enforcement actions with penalties ranging from $180
million to $425 million each.

Finally, despite the administration's promise to limit
regulatory burdens on the financial industry, there has been little
indication that it desires to pull back on the enforcement of
existing regulations, especially those contributing to national
security. Indeed, holding financial institutions accountable for
perceived deficiencies in controls designed to thwart money
laundering and the financing of terrorism aligns with the
president's campaign positions. Accordingly, financial
institutions would do well to strengthen their commitment to AML
compliance. As a first step, financial institutions should assess
thoroughly their risk-profiles and consider how much support and
resources must be allocated to AML officers and compliance
departments to properly mitigate those risks.

On July 24, 2017, the U.S. Department of Labor's Veterans' Employment and Training Service (VETS) sent a letter clarifying the data collection and reporting periods for the VETS-4212 and EEO-1 reports.

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